Mar 22 2007
The Federal Reserve held interest rates steady on Wednesday and raised the possibility they could be cut in the months ahead, igniting a rally on Wall Street where investors are thirsting for a reduction. Fed Chairman Ben Bernanke and his central bank colleagues left an important interest rate unchanged at 5.25 percent, the sixth straight meeting without budging the rate.
The Dow soared 159.42, or 1.30 percent, to 12,447.52, biggest one-day point gain since July 24. The Standard & Poor’s 500 index jumped 24.10, or 1.71 percent, to 1,435.04, and the Nasdaq composite index advanced 47.71, or 1.98 percent, to 2,455.92.
The Fed’s decision means that commercial banks’ prime interest rate – for certain credit cards, home equity lines of credit and other loans – stays at 8.25 percent. The Fed has left rates alone since August, giving borrowers time to catch their breath after two years of steadily rising rates. Investors are betting the Fed will cut rates later this year to guard against any undue economic weakness. Many economists predict the central bank will probably start cutting rates early next year.
The Fed is still sticking to its forecast that inflation should recede over time and that the economy – despite strains from the housing slump and troubles facing lenders and borrowers of risky mortgages. The Fed did slightly downgrade its assessment of current economic conditions, saying recent barometers “have been mixed.” In contrast, at its previous meeting in late January, the Fed said recent indicators “suggested somewhat firmer economic growth.”
The economy has been feeling the strain of the housing slump. Investment in home building in the fourth quarter was slashed by 19.1 percent on an annualized basis, the steepest decline in 15 years. However, the jobs market remains in good shape. The unemployment rate dropped to 4.5 percent in February and workers got fatter paychecks even as bad winter weather sent a chill through U.S. job growth.
Fed policymakers continued to make clear that the biggest risk to the economy is inflation. To fend off inflation, the Fed steadily boosted interest rates for two years, the longest stretch in its history. But since last summer, it has left rates alone. The Fed’s goal is to slow the economy sufficiently to thwart inflation but not so much as to cripple economic activity.
Other countries such as Malaysia, Singapore & Thailand are expected to take the cue from the Fed’s move and maintain the existing interest rate.
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March 22nd, 2007 by financetwitter
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